IMF chief warns global recovery in danger

The head of the International Monetary Fund repeated Thursday her warning that the global economy is in a "dangerous new phase," and called for coordinated action by governments in the face of a slowing global economy and a deepening European debt crisis.

IMF managing director Christine Lagarde also called on European countries to get their spending under control and for banks in the region to ensure they have enough cash on their balance sheets for emergencies.

Her comments came after the European Central Bank unveiled plans to lend American dollars to banks in three operations to be conducted in October, November and December.

The move was widely seen as a sign that the banks aren’t providing short-term lending to each other because of fears about the quality of their loans to debt-burdened countries such as Greece, Ireland, Portugal, Spain and Italy.

 The program will likely prevent a panic for the next few months, but it's only a first step, said Mark McCormick, a currency strategist at Brown Brothers Harriman.

"You're warding off contagion and crisis, but it's not going to solve the problem, which is too much debt," McCormick said, but added it was smart for the central banks to address the problem early.

In her speech in Washington, Lagarde also pointed to the problem of high debt, not only across the world economic system and especially among governments and banks in Europe, but also in U.S. households.

'It's not going to solve the problem, which is too much debt.' —Mark McCormick, currency strategist, Brown Brothers Harriman

The uncertainty about their ability to meet their obligations slows economic recovery, a problem made worse by policy indecision by political leaders, she said.

Lagarde evoked memories of the financial crisis in 2008, and called on the heads of the major European economies to provide leadership.

"Exactly three years after the collapse of Lehman Brothers, the economic skies look troubled and turbulent as global activity slows and downside risks increase," Lagarde said.

"Without collective resolve, the confidence that the world so badly needs will not return."

Her warning came as the European Commission reduced its outlook for growth in the region in the second half of the year but predicted that it would avoid an outright recession.

Still, EU economic affairs commissioner Olli Rehn said the economy was likely to come to a "virtual standstill," dragged down by the region's massive debt burden.

The EC kept its growth prediction for 2011 at 1.6 per cent, but said activity would slow to 0.2 per cent in the third quarter and just 0.1 per cent in the last three months of the year.

And the Greek finance minister, Evangelos Venizelos, warned that the country must brace for a fourth year of recession, amid new data showing unemployment had hit a new high of 16.3 per cent. He said the Greek economy will contract 5.3 per cent this year. 

Finance ministers to meet

Eurozone finance ministers will meet in Wroclaw, Poland, beginning on Friday to discuss how to deal with the debt crisis.

U.S. Treasury Secretary Timothy Geithner will take part on Saturday and is expected to plead for more decisive measures to prevent a Greek default that could threaten Europe's banks and even spread to the global financial system.

Lagarde said she welcomes U.S. President Barack Obama's job creation plan given what she called an unemployment crisis in the United States.

Lagarde will preside at her first annual meeting of the 187-nation lending institution next week.

The former French finance minister became director on July 5 after taking over from Dominique Strauss-Kahn, who resigned in May to fight attempted rape charges. The charges were later dismissed.